Need to follow the principles of sound financial management

Money management for seniors is critical as they are no longer on active duty and therefore there is no regular cash flow. So what they need to do is make sure they live a happy and dignified life within their means. This means that they manage their “existing finances” in such a way that they can last until they live in this world. This is especially true for those who have no pension after retirement. Assuming a person retires at age 60, they must plan for the finances of at least 15 to 20 of their post-retirement lives for themselves as well as their spouse. With virtually no social security and living in a world of high inflation and low returns, it is difficult for seniors to survive. This becomes all the more important as we age and medical costs become high and unpredictable.

In the above circumstances, sound financial management principles become crucial as it is impossible to lead a life without money.

Some principles of financial management:

1. Assess corpus requirements: This is the first step. Each senior should estimate their monthly financial needs for food, medicine, medical insurance, essentials/other items, and also keep a reasonable surplus for unforeseen future expenses. Suppose, for example, that the total expenditure on a monthly basis amounts to around Rs 1.00 lac for a two-member family. Therefore, on an annual basis, the planned expenditure is Rs 12.00 lacs. Assuming 5% annualized interest income on deposits, the total corpus requirement on a pre-tax basis will be around Rs 2.5 crores from today. Although this is a very simplistic calculation devoid of any discounting effect, it gives a fair idea of ​​how to evaluate the corpus. The corpus hypothesis is based on the estimation of two variables, namely the interest rate on the corpus and the expenses. This assessment is crucial because the corpus is the main source of financial support for the family of an elderly person.

2. Maximize returns with reasonable risk: This is the crucial next step. Every senior should try to see how to maximize returns on the corpus without taking high risk. This is important because fixed bank deposits, while safe to some extent, do not yield an adequate return. It may therefore be advisable for them to invest a certain amount in alternative schemes like the Senior Citizen Saving Scheme (SCSS) and/or Pradhan Mantri Vaya Vandana Yojana (PMVVY). Both are good in terms of yield with marginal differences in liquidity. There are also opportunities through fixed income investments in some good, well-rated corporate sectors. Seniors can think about investing at least part of their corpus in such securities. Considering the high risk, we suggest seniors avoid investing in the stock market other than through selected and appropriate mutual funds. A small part of the surplus funds they have (10-15%) can be invested in these funds. However, it is always suggested that they go through an expert advisor if they are unfamiliar with the nuances of the capital market.

3. Minimize expenses: It is time for seniors to take a serious look at their cash outflows. This is especially true for those who belong to the middle class. While we don’t recommend seniors to be stingy, we definitely ask them to be realistic about spending, take a minimalist outlook on life, avoid a wealthy lifestyle, and try to maintain a healthy balance between income and expenses leaving a balance to take care of unpredictable future eventualities. The most important strategy is to change lifestyle habits or take definite steps to reduce the cost of living. For example, if an older person is staying in a large house that may not be needed and the person is in a cash-short situation, they can explore the possibility of moving to a smaller rented accommodation. or to a retirement home by selling or renting an existing home. The steps are certainly not prescriptive but suggestive based on individual needs and choices.

4. Get money from unconventional sources: Sometimes alumni have to look for unconventional ways to improve their cash-raising strategies. Such a way could be “Reverse Mortgage”. Under this program, a senior (60+) can mortgage their unencumbered residential property to a lender (bank) and get a specific amount from the lender for a specific period of time (max 20 years). The amount to be received from the bank depends on the value of the property, the age of the borrower and the prevailing interest rate. Additionally, the borrower has no obligation to repay the loan during their lifetime if they choose to continue to stay in the home. After the death of the borrower, his spouse (co-borrower) can continue to stay until his death. After the death of the two co-borrowers, the loan could be adjusted after the sale of the house. Seniors must be made aware of these devices and they can use them if necessary.

5. Monitoring and control: The last principle of all prudent financial management is strict control to ensure that everything runs smoothly. In this context, the senior must ensure that the risks taken are within safe limits, that they are not prey to any fraud / scam, that all loopholes are closed and that the cash inflows are greater than the outflows. . This constant monitoring will make it possible to achieve financial management objectives.

conclusion:

To ensure that an older person can continue to live with dignity and happiness, they are required to follow the principles of sound financial management. This alone can be one of the pillars of a happy life to come.

Posted: Saturday, March 19, 2022, 1:46 PM IST

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